How Republicans Can WIN on Social Security

I Wish This Were Clickbait…

But it’s not.

The economic damage done by the over-reaction to Covid-1984 has impacted millions. And unfortunately, for many, the pain will be felt for years to come, via a potentially HUGE reduction in Social Security benefits.

This pains me to write this. As I’m a HUGE proponent of Social Security and, in fact, even wrote an entire book proving that you can actually retire on Social Security alone.  You can buy the book by clicking on the link below if you’re so inclined.

However if you were born in 1960, and potentially any year after that, this may no longer be true due to how Social Security calculates your benefit.

Let’s start with the basics.  Social Security indexes your wages to what’s called an Average Wage Index(AWI). Essentially they inflate the money you made in previous years to give you a benefit that pays out in current dollars.

For instance, in 1991 I was an E-4 in the Army. I made around $11,000.  If Social Security were to give me a benefit based on that amount alone, I might be able to buy a bag of Ramen noodles and that’s it.

Instead what they do is they INDEX that $11,000 to the increase in average wages over the years. Click this link to see exactly how this works.

Because I was born in 1970 my earliest year of eligibility (when I turn 62) is 2032.  So, I type 2032 in the box hit enter and VOILA! I get my indexing numbers.

I see my indexing amount for 1991 is 3.7398426.  So, I take the $11,000 I made in 1991 times by that indexing amount to get $41,138.  That is the dollar amount that Social Security uses to calculate my wage base for the year 1991.

Social Security does that for each and every year you paid payroll taxes.  They then add up your top 35 years, divide that number by 420 and you get your AIME.

Your AIME is the number the Social Security Administration uses to calculate your PIA, which is your benefit you’ll receive at FRA.  I know, a LOT of acronyms going on here.  And I’m not going to take the time to explain all this here.  Buy my book down below or simply watch my Youtube channel as I’ve discussed these formulas a million times to Sunday.

The kicker here though is your INDEX NUMBERS.  That is what determines your INDEXED AMOUNTS that ultimately determine what your benefit is.

What I did not know was that your index numbers are not permanent. They can actually change, retroactively, depending on the economy for the year in which you turn 60!   Read this article NOW!  It’s from Andrew Biggs, who I’ve interviewed twice, here and here.

In summary:
“Assuming a 15 percent decline in the Social Security Administration’s measure of economywide average wages in 2020, a middle-income worker born in 1960 could have his annual Social Security benefits in retirement reduced by around 13 percent, with losses over the retirement period in excess of $70,000.”

“(W)hen the Average Wage Index in (the year you turn 60) falls below projected levels by a given amount, earnings in all past years are also reduced by a similar percentage.”(emphasis mine.)

So, a decline in the GDP in the year you turn 60 means a decline in your Social Security benefit…and that decline in your benefit could be HUGE – hundreds of dollars a month!

To prove the point, I did a series of videos on this exact thing showing what happened to people who turned 60 during the last economic downturn in 2009.  Now the economy dropped that year by all of .4%, not 4% but .4%!

And even with that tiny decline the folks who were born in 1949 received thousands less in benefits than those born 1 year before or after them. See here and then here.

What does this all mean? Simple, the folks advocating for the economic shut down, and CONTINUED shut down, are going to impact YOUR retirement plans!  And that is not acceptable.

Just because of the year in which you were born you could lose $10.000s of benefit.  Did the amount of taxes you paid into the system change? Nope.

Did the extra years you worked to solidify your retirement change? Nope.

You did what you were supposed to do. You played by the rules and JUST LIKE THAT the rules are going to bite you by no fault of your own.

Oh, don’t think if you were born, say in 1970 like me, this may not affect you either.  Do you not know the economic decline from 1927-1939?   Think you’ll be exempt if we follow a similar path that our leaders took us down during that time period?

If we go into a massive regulatory environment, ala the 30s, rest assured, your Social Security benefit, and mine, will be reduced too.

We need to hope for quick economic downturn similar to what transpired in 1921 as written about by James Grant in his book, “The Forgotten Depression”.

Hopefully our leaders will read Murray Rothbard’s account of the reason why the Depression of the 30’s became “Great” and not in a good way.

However, given it’s our leaders who put us in this mess with their incessant desire to “follow the science”, whatever the h**l that means, I’m not holding my breath.

Eisenhower warned us about our credentialed elites dominating society:

“Today, the solitary inventor, tinkering in his shop, has been over shadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.”

It appears we’ve arrived at such a place and sadly the regular person is being shut out from the debate.

Forget all that! The one area YOU do have power is by your ability to raise a ruckus with your representatives.  Trust me, the last thing your elected officials want is a bee in their bonnets.  Politicians are like electricity and they will ALWAYS go the path of least resistance.

Nassim Nicholas Taleb calls this the Dictatorship of the Small Minority because those tend to be the loudest voices…all the while the rest of us just about our lives trying to put food on the table.

Well, sorry to wake you from your comfortable slumber, but if our leaders can get away with THIS to reduce your Social Security benefits, what comes next?  Doubling of Medicare premiums?

You need to use your voice to say this needs to be fixed! You did what you were supposed to do.  You “social distanced”, you “sheltered at home”, heck many of you lost your flippin jobs or businesses!

And now you’re potentially going to lose thousands in the one thing that is supposed to stand solid for you?

Do not stay silent.

Raise a ruckus until they change this.

Republicans have an issue ready-made for them that will secure their legacies for a generation: Social Security (and Medicare for good measure). But until Trump came along no Republican had the political sense to actually see this issue for what it is, a huge potential to expand their voting base. 

Other than some teachers in a few counties, and pre-FERS government employees, everyone receives Social Security.  A huge amount of retirees rely on Social Security for the vast majority of their retirement income. It doesn’t take a rocket scientist to see the huge importance of this issue for voters.

Add the fact that the older voter actually votes in a much higher proportion than younger voters you can quickly see why abandoning the Social Security issue is bad politics. Go to where the votes are, after all.

Okay, first off, let’s establish the fact that Social Security is NOT a welfare benefit. Since 1990, every single worker pays 6.2% of his salary into Social Security.  That 6.2% is matched by the employer’s contribution. So, 12.4% of pay is being allocated to Social Security.    

Secondly, the Social Security Administration only takes the top 35 years of INDEXED earnings into calculation to determine one’s benefit.  This means the lowest years of your earnings years are most not likely included into your benefit, yet, you did pay taxes in those years.  

For instance, in 1989 I was a Private in the Army.  I paid FICA tax on my $7,854 of earnings that year. However, because I was all of 19 then, and didn’t make much income, it’s safe to assume that year of taxation will not be used to calculate my benefit. Again, the Social Security Administration only takes the highest 35 years of indexed earnings to determine your benefit.  This means that if you had earned income for 45 years, 10 years of those earnings are not included in your benefit. 

So, let’s just nip in the bud once and for all that Social Security is a “transfer” payment similar to other welfare programs like Food Stamps. It’s not. One could make an argument about Medicare because we don’t pay nearly as much into Medicare as we do into Social Security but I’d challenge that too, as both employee and employer are paying 1.45%. (Medicaid is a whole different thing which we won’t discuss here.)

Hopefully, we’ve established that not only is Social Security important to most Americans but to treat it as a welfare benefit is not only disingenuous it is demeaning too to the voting population. Don’t do that!

However, Social Security, like most pension programs, is not on financially secure ground. It’s not nearly as bad as naysayers claim, though. Just read the Trustees report for Heaven’s sake!  The system’s projections are based on three scenarios; Low-cost, high-cost and intermediate.  The low-cost could be looked at as the best case scenario; the high-cost, the worst case and Intermediate is what we hear about when the media reports on Social Security “running out of money in year 2034.” 

Now, there is a lot that goes into the projections of Social Security; Interest rates, labor force, GDP, but probably most important is the actual unemployment rate.  The unemployment rate used in the low-cost, i.e., best case scenario, is 4.6% until 2030 and 4.5% from then until 2095. The intermediate scenario, which again, is what is reported, is 5.5% each year for the next 70 years. 

Wanna guess what unemployment is now?  3.6%.   Think that’s an anomaly? Well, let’s take a look at Japan. It’s 2.4% and it’s been under 4.5% since 2012.  Does anyone actually think Japan’s unemployment rate will breach 5% anytime soon? I don’t.  In fact, I argue our economy is likely to follow the Japanese model, low unemployment, low inflation, low interest rates and low GDP as opposed to the insanity of the Nixon years, with high interest rates, unemployment and inflation. 

What we can take away is that Social Security, in my opinion, is not insolvent by any stretch. But it can be strengthened and expanded. 

Let’s talk about how Trump and the Republicans can cement their legacies for a generation, similar to how FDR did for the Dems.  Strengthen Social Security in order to INCREASE the payout to middle and lower income retirees. It’s so easy to do this too. 

You need to understand how Social Security calculates your payout.  They take your top 35 years of Indexed Earnings, add those together and then divide by 420 to get your Averaged Indexed Monthly Earnings (your AIME).

They then divide your AIME by 3 separate bend points.  The first bend point you get 90% of your first $960 of your AIME.  The second bend point you get 32% of the next $4,825 of your AIME. Anything above $5,785 you get 15%. 

To show you how this works let’s say over the course of your top 35 years of earnings you made an index-adjusted $50,000 a year.  In that case, your total indexed earnings are $1,750,000. You then divide that amount by 420 to get an AIME of $4,166.

You will receive 90% of the first $960 of that AIME. And 32% of the remainder.  So, $960 *.90 = $864. $3,206 * .32 = $1,025. $1,025+$864 = $1,889. That $1,889 is your monthly Social Security benefit at your Full Retirement Age which will be between 66 and 67 depending on the year you were born. 

In this example, Social Security will replace about 45% of your gross income.  Given how much you and your employer actually contributed to the program over the course of your decades in the workforce $1,889 a month is not a great amount of retirement income. 

Oh yes indeed, I know “Social Security was never supposed to be the sole source of retirement income…” etc… Yeah, and that was when the taxes paid into Social Security was all of 1.5% of pay. It’s since MORE than quadrupled. In fact, for many workers FICA is the biggest tax they pay. 

So save your sanctimonious cries of people should have saved more.  They DID save! In this program called Social Security and now they aren’t getting out a reasonable benefit for the amounts they put in. 

The simple way to rectify this is to increase the 2nd bend point from 32% to 50%.  This would increase the benefit of that $50,000 worker by 30% to $2,467 a month. Social Security would then provide a much more reasonable replacement rate of nearly 60% which is actually right in line with what most people will need in retirement.  If they were able to save more, fantastic. If not, at least they’ll have a bit more comfort for all the years they labored and paid taxes into the system.

How will this be paid for? One way would be to incorporate Social Security taxation on all those with annual income over $1 million. Not just earned income but all income. Qualified Dividends and Long Term Capital Gains are still taxed preferably to Ordinary Income, by the way. So, while the extra Social Security tax would be new it won’t eliminate the huge benefit in QDI and LTCG tax rates. 

How to pay for it is something actuaries can number-crunch and the devil is always in the details anyway.  However, to focus solely on cost while avoiding the huge political benefit of the increase is just bad politics. The middle class is rapidly becoming the GOP base. /it’s the middle class who will benefit most by this proposal and that includes many groups of voters who for generations have not even given the GOP the time of day, primarily black voters. 

If the GOP were to move just 10% of black voters to, all the while retaining their grasp on middle class whites, the left would be done for. 

And how glorious that would be? To debate technical issues of a Social Security benefit increase rather than having to defend from such nonsense as “they’re gonna put you back in chains.”

It’s time the GOP take it to them. Social Security is the way to do it. Do not walk away from this opportunity. Grasp it and win, bigly. 

 

 

 

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